VNU - University of Economics and Business

Principles of Accounting
Faculty of Accounting and Auditing
VNU - University of Economics & business
Lecturer: Dau Hoang Hung
Cell phone: 0397.135.868
 Chapter 3
Recording inventory
 Learning objectives
After finishing this chapter, you will be able to:
➢ Explain why it is inappropriate to use an inventory account to record
increases and decreases in inventory;
➢ Describe the two causes of inventory increase;
➢ Describe the two causes of inventory decreasing;
➢ Explain the difference between a purchase account and a return
inwards account;
➢ Explain the difference between a sales account and a return
outwards account;
 Learning objectives (Continued)
➢ Explain the meanings of the terms ‘purchases’ and ‘sales’ as
used in accounting;
➢ Explain the differences in recording purchases on credit as
compared to recording purchases that are paid for
immediately in cash;
➢ Explain the differences in recording sales on credit as
compared to recording sales that are paid for immediately in
cash.
What is Inventory?
(IAS 02)

According to IAS 2 (Inventories):

inventories are assets held for sale in the
ordinary course of business, in the process
of production for sale, or in the form of
materials or supplies to be consumed in
production or rendering of services.
 What is Inventory?
(IAS 02)

Inventories are assets:

Held for sale in the ordinary course of

business;

In the process of production for such

sale; or

in the form of materials or supplies to be

consumed in the production process or in
the rendering of services
 Inventory
Normally, goods and services are
sold above cost price, the
difference being profit.

When goods and services are sold

for less than their cost, the
difference is a loss.
 Inventory

A bookstore buys a novel for $10 and

sells it for $15.
Profit = Selling Price - Cost Price
= $15 - $10 = $5.
 Inventory
A clothing store buys a jacket for $50 but
has to sell it at $40 due to a clearance sale.
Loss = Cost Price - Selling Price
= $50 - $40 = $10.
 Inventory Recording Methods
Perpetual Inventory Periodic Inventory System

This system involves the maintenance No detailed record of inventory is

of detailed inventory records in the being maintained during the year. An
accounting system. A continuous record actual physical count of the goods
is maintained on a transaction-by- remaining on hand is required at the
transaction basis throughout the period end of each period
 Inventory Recording Methods
The Perpetual Inventory System
Every transaction affecting inventory is recorded directly in the
Inventory account.
Purchases are recorded as debits to Inventory, and sales are
recorded as credits, reflecting real-time changes
Cost of Goods Sold (COGS) is updated automatically with each
sale
 Inventory Recording Methods
The Periodic Inventory System
Purchases are recorded in a Purchases account, not directly in
Inventory
At the end of the period, the inventory balance is updated after a
physical count
The Cost of Goods Sold is determined using the formula:
COGS = Beginning Inventory + Purchases - Ending Inventory
 An increase in inventory
(The Periodic Inventory System)

An increase in inventory can be due to one of

two causes:
➢ The purchase of additional goods.
➢ Thereturn in to the business of goods
previously sold.
 An increase in inventory
(Continued)
To distinguish the two aspects of the increase of
inventory, two accounts are opened:
➢A purchases account, in which purchases of goods
are entered.
➢A return inwards account, in which goods being
returned into the business are entered.
 A decrease in inventory
(The Periodic Inventory System)
A decrease in inventory can be due to one
of two causes:
➢ The sale of goods.
➢ Goods previously bought by the business
now being returned to the supplier.
 A decrease in inventory
(Continued)
To distinguish the two aspects of the decrease of
inventory, two accounts are opened:
➢A sales account, in which sales of goods are
entered.
➢A return outwards account, in which goods
being returned out to a supplier are entered.
 Purchase of
inventory on credit
On 1 August 2012, goods costing £165
are bought on credit from D. Henry.
 Purchase of
inventory for cash
On 2 August 2012, goods costing £310
are bought, cash being paid for them
immediately at the time of purchase.
Sales of inventory on
credit
On 3 August 2012, goods were sold
on credit for £375 to J. Lee.
Sales of inventory for cash

On 4 August 2012, goods are sold for

£55, cash being received immediately
at the time of sale.
 Returns inwards
On 5 August 2012, goods which had been
previously sold to F. Lower for £29 are
now returned to the business.
 Returns outwards
On 6 August 2012, goods previously bought
for £96 are returned by the business to
K. Howe.
Periodic Inventory System:
Journal Entries
 Practice Exercise 3.3

You are to write up the following in the books:

2019 July 1 Started in business with £3,800 cash

3 Bought goods for cash £480

Activity 7 Bought goods on time £1,200 from J. Gill

10 Sold goods for cash £172

14 Returned goods to J. Gill £240

24 Sold goods to A. Prince £292 on time

25 Paid J. Gill's account by cash £960

31 A. Prince paid us his account in cash £292

1 July 1, 2019 – Started business with cash of £3,800
No inventory entry is made as this is just the starting
transaction of the business.

Cash Capital
1 Jul £3,800 1 Jul £3,800

2 July 3, 2019 – Bought goods for cash £480

Under the periodic system, we don't immediately record inventory;
we only record the purchase of goods.

Purchases Cash
3 Jul £480 3 Jul £480
 3
July 7, 2019 – Bought goods on credit £1,200 from J. Gill
As with the previous purchase, inventory is not recorded immediately, but
we record the purchase.
Purchases A. Payable (J. Gill)
7 Jul £1200 7 Jul £1200

4
July 10, 2019 – Sold goods for cash £172
Under the periodic system, revenue is recorded but not the cost of goods sold or
inventory change.
Cash Sale
10 Jul £172 10 Jul £172
 5
July 14, 2019 – Returned goods to J. Gill
£240
This does not affect inventory directly in the period;
it reduces the purchases recorded temporarily.

Journal Entry:
Debit: Accounts payable £240
Credit: Purchases £240

6
July 24, 2019 – Sold goods to A. Prince on credit £292
Revenue is recorded but not the cost of goods sold or inventory change.

Journal Entry:
Debit: Accounts receivable £292
Credit: Sales revenue £292
July 25, 2019 – Paid J. Gill's account £960
This reduces accounts payable.
Journal Entry:
Debit: Accounts payable £960
Credit: Cash £960

July 31, 2019 – A. Prince paid his account

in cash £292
Updates the cash received from A. Prince.

Journal Entry:
Debit: Cash £292
Credit: Accounts receivable £292
 Final Cost of Goods Sold Calculation

At the end of the period (July 31, 2019): When the physical inventory count is
done, the actual ending inventory value is determined, and adjustments are
made. You will then update the inventory and cost of goods sold.

The cost of goods sold (COGS) will be calculated as:

COGS = (Beginning inventory + Purchases during the period) - Ending inventory.

Example: Assume the ending inventory is £1,000.

Calculate Purchases
The value of goods purchased during the period is £1,200 + £480 = £1,680.

Net purchases: £1,680 – £240 = £1,440

COGS = (0 + £1,440) – £1,000 = £440

Adjusting entry
Debit: Cost of Goods Sold £440
Credit: Inventory £440
Activity
The inventory value for the financial statements of Global Co for the year
ended 30 June 2024 was based on a inventory count on 7 July 2024, which
gave a total inventory of $950.000.
Between 30 June an 7 July 2024, the following transactions took place:

Purchases of goods: $11.750

Sale of goods (mark up on cost at 15%): $14,950
Goods returned by Global Co to supplier: $1.500

What figure should be included in the financial statements for inventories at 30

June 2024?
 Special meaning of ‘sales’ and ‘purchases’
Both ‘sales’ and ‘purchases’ have a special meaning in accounting.

Purchases Sale

Purchases means the Sales means the sale of those

purchase of those goods which goods in which the business
the business buys with the sole normally deals and which were
intention of selling. bought with the prime intention of
resale.
 Learning outcomes
You should have now learnt:
➢ That it is not appropriate to use an
inventory account to record increases and
decreases in inventory because inventory
is normally sold at a price greater than its
cost.
➢ That inventory increases either because
some inventory has been purchases or
because the inventory that was sold has
been returned by the buyer.
 Learning outcomes (Continued)
➢ That inventory decreases either because some
inventory has been sold or because inventory
previously purchased has been returned to the
supplier.
➢ That a purchase account is used to record purchases
of inventory (as debit entries in the account) and that
a return inward account is used to record inventory
returned by customers (as debit entries in the
account).
 Learning outcomes (Continued)

➢ That a sales account is used to record sales of

inventory (as credit entries in the account) and
that a return outwards account is used to record
inventory returned to suppliers (as credit entries in
the account).
 Learning outcomes (Continued)
➢ In accounting, the term ‘purchases’ refers to purchases of
inventory. Acquisitions of any other assets, such as vans,
equipment, and buildings, are never described as
purchases.
➢ That in accounting, the term ‘sales’ refers to sales of
inventory. Disposals of any other assets, such as vans,
equipment, and buildings, are never described as sales.
➢ That purchases for cash are never entered in the supplier’s
account.
Learning outcomes (Continued)
➢ That purchases on credit are always
entered in the supplier’s (creditor’s)
account.
➢ That sales for cash are never entered in
the customer’s account.
➢ That sales on credit are always entered in
the customer’s (debtor’s) account.
Thank you!